Merafe Resources warns of a frustrating year ahead
Glencore’s junior ferrochrome partner says high power costs, Covid-19 and now Transnet make business difficult
Merafe Resources, which reported a difficult year that included laying off a tenth of its workforce, warned of another frustrating year ahead beset by tariff hikes and Transnet’s failure to provide enough trains. The company, a junior partner in a chrome mining and ferrochrome business with Glencore, reported a wider after-tax loss in the year to December as the Covid-19 pandemic resulted in suspended operations across SA’s mining industry from March, with a slow return to normality by September. Beset by regulatory uncertainty, electricity tariffs that have increased more than sixfold since 2006 and irregular Eskom supply, large exporters have complained about the ability of Transnet Freight Rail (TFR) to deliver their minerals to ports. That left chrome, ferrochrome, coal and manganese companies frustrated at yet more difficulties in operating in SA. The joint venture participants flagged unavailability of trains as quickly becoming one of their most important challenges. Japie Fullard, head of Glencore Ferroalloys, said on Monday it experienced train availability rates of down to 40%. “With all the operations and ferrochrome smelters coming back into operation, it is putting huge pressure on the whole logistical chain to the extent that we are really battling to get our product out. It’s a big challenge. It’s moved to one of our top focus areas.” If cost-effective trains are not available, companies turn to trucks to haul their ferrochrome and chrome ore to the ports of Richards Bay, Durban and even Mozambique’s Maputo at a higher price. TFR has said that in the past three years, especially after SA eased Covid-19-related restrictions in 2020, that “security-related attacks on TFR infrastructure and assets have increased drastically”. TFR spokesperson Jane Moshoeshoe. said: “The theft of overhead cables and railway equipment in SA has reached unprecedented levels and the impact is felt by critical industries such as mining, automotive, steel and agriculture.” From April 2019 to January 2020, 354km of overhead electricity cables powering locomotives were stolen from TFR infrastructure, with 21 trains a day cancelled. In 2020, TFR was hit by nearly 5,140 incidents of cable theft and vandalism. JSE-listed Merafe, the 20.5% holder of the joint venture, reported an after-tax loss of R1bn for the year to end-December compared with a R1.4bn loss the year before. Both years were marked by large impairments of plant, property and equipment with R1.4bn in 2020 and R1.8bn the year before. After paying a dividend of 4c a share, or R100m out of cash in 2019, Merafe’s board opted to keep its cash of R278m within the company. RESTRUCTURING Merafe and Glencore undertook a restructuring of its business during 2020, a year in which the Covid-19 pandemic resulted in SA’s ferrochrome output falling by a quarter. The partnership laid off 976 people at a cost of R474m during the year. It has a total staff and contractor complement of nearly 9,000 people. “The process was triggered by deteriorating operating and market conditions across the SA ferrochrome industry, including unsustainable electricity tariffs and interruptions, cross-subsidies and real cost inflation,” said Merafe CEO Zanele Matlala. Eskom has been granted permission to increase its tariffs 15.6%, well above inflation. This will add pressure to the business and SA’s ferrochrome industry, which supplies the feedstock to make stainless steel. For the joint venture, electricity makes up a fifth of costs. Improved chrome and ferrochrome prices so far in 2021 have offset any need to further restructure the business, but there is an intense focus on cost control and negotiations with Eskom to secure a negotiated price agreement, resulting in critically important lower tariffs, Fullard said. THE THEFT OF OVERHEAD CABLES AND RAILWAY EQUIPMENT IN SA HAS REACHED UNPRECEDENTED LEVELS The joint venture is also in talks with Eskom and the National Energy Regulator of SA about a 14% subsidy on top of the tariffs for large electricity users to fund others. The intention is to have this removed, he said. While the Lydenburg smelter and a furnace in Rustenburg remain mothballed, if Eskom is able to sustainably reduce tariffs and ferrochrome prices remain firm, the possibility exists of restarting these plants, said Fullard. The venture has installed capacity to produce 2.3-million tonnes a year of ferrochrome and it is targeting production of up to 80%, or 1.84-million tonnes, of that production during 2021, said Fullard. The venture realised just 56% of installed capacity with output of 1.29-million tonnes during 2020.